Saudi inflation to edge up, no policy action seen

Riyadh, August 25, 2010

Saudi inflation will probably keep edging higher after hitting a 17-month high in July, but the central bank is unlikely to take any action as the main sources of price pressures are beyond its control, analysts say.

Consumer price growth in the world's biggest oil exporter has been taking the market by surprise over the past few months as food and housing costs pushed the headline rate well above levels seen in other Gulf countries.

Inflation climbed to 6.0 percent year-on-year in July, matching its March 2009 level, rising from 5.5 percent the previous month, but still far from a record peak of 13.7 percent in June 2008, data showed late on Monday.

On the month, prices in the top Arab economy jumped 1.0 percent, the steepest monthly rise since October 2008, fuelled by food and transport costs. "We are going to see inflation on an upward trend in Saudi," said Philippe Dauba-Pantanacce, Mena economist at Standard Chartered.

"No double digits ... but at least compared with the rest of the region it is definitely abnormal territories," he said.

Saudi inflation is expected to move higher in August as food prices usually rise during the holy month of Ramadan as families break their fast with large evening meals.

"Pressure on food prices could become more elevated in the short term due to greater demand in Ramadan as well as short-term external factors, such as higher global food costs caused by some poor harvests (in Russia) and a weaker US currency," John Sfakianakis, chief economist at Banque Saudi Fransi, said in a research note.

Russia, usually the world's third-largest wheat exporter, has harvested 38 percent less so far in 2010 and banned exports in the wake of a severe drought. Foodstuffs account for around 15 percent of Saudi imports.

Price pressures are seen building up further in November during the arrival of almost 2 million pilgrims to the desert kingdom for the annual Haj season. Analysts polled by Reuters in June expected Saudi inflation of 4.7 percent this year, up from 5.1 percent in 2009.

The Saudi central bank said earlier this month it did not expect heavy inflationary pressure in the third quarter, although the pressure may continue due to higher rents and energy costs as well as food prices.

Industry experts estimate that just 30 percent of Saudis own their own home, while the country has a deficit of around 2 million housing units.

Analysts said the central bank is unlikely to change its policy settings, as an interest rate hike would have no impact on food and housing costs, the main driving forces. "I do not yet think it is a huge concern of the authorities. I still think the priority is stimulating the domestic economy," said Paul Gamble, head of research at Jadwa Investment.

"If this inflation was a result of a rapid growth in bank lending you could see them doing something, but as bank lending is still very sluggish, there is not that much they can do and they should do, really," he said.

Saudi Arabia has kept its repo rate at 2 percent since January 2009. The Opec member's tools to battle inflation are limited by its currency peg to the US dollar. - Reuters